KDB says Hanjin KAL funding on the up and up

With major shareholders and politicians objecting to the takeover of Asiana Airlines by Korean Air Lines, the head of Korean Development Bank (KDB) defended the government-owned institution's financing of the deal.

Lee Dong-gull, chairman of Korea Development Bank, speaks during an online press conference on Thursday. [KOREA DEVELOPMENT BANK]

With major shareholders and politicians objecting to the takeover of Asiana Airlines by Korean Air Lines, the head of Korean Development Bank (KDB) defended the government-owned institution’s financing of the deal.

“The global airlines business is on the verge of collapse directly hit by Covid-19,” Lee Dong-gull, chairman of the KDB, said Thursday in an online press conference. “If they continue operating like this, Korea’s airlines will be destroyed.”

KDB is providing 800 billion won ($716 million) of funding to Hanjin KAL, which owns almost one-third of Korean Air Lines. Those funds will be used to purchase more Korean Air Lines stock, which will allow the airline to buy a controlling stake in Asiana Airlines.

The bank will end up owning 10.66 percent of Hanjin KAL.

The deal is being objected to on grounds that the government is giving Hanjin KAL preferential treatment, that government funds are being used to prop up the companies and that the transaction, the way it is structured, could help Chairman Cho Won-tae in controlling Hanjin KAL and Korean Air Lines.

Leading the charge against the deal is Korea Corporate Governance Improvement (KCGI), which together with other shareholders controls 46 percent of Hanjin KAL’s shares, the largest block of stock.

KCGI claims that KDB will vote with Cho, who together with allies controls 41 percent of the shares. That calculation assumes that Delta Air Lines, which owns 14.6 percent of the stock, will support Cho. Delta has never commented on how it will vote, other than to say it wants to see stability at it major partner.

Taxpayer money is being used “to defend Cho Won-tae’s control over the group,” KCGI said in a statement posted on its website on Nov. 17. “Without proper process of due diligence and value evaluation, the acquisition of Asiana Airlines will only result in Cho Won-tae gaining 10 percent stake to his side and sacrificing the rights of other shareholders.”

If KDB and Delta were to support Cho Won-tae, he and his allies would have the largest shareholding.

“Although KDB will have 10 percent of Hanjin KAL, the bank is going to maintain a neutral stance, checking the opinions of both sides at all times and cooperate if necessary,” said Lee. “KDB doesn’t unilaterally support Chairman Cho.”

The bank also said that buying equity rather than just loaning money is an important part of the process. Of the 800 million won of funding, 500 million won is stock.

“If we financed the entire 800 billion won only through buying exchangeable bonds, that would limit KDB’s role to only a creditor, and we would not be able to exercise our role as a supervisor,” said bank Vice President Choi Dae-hyun.

“Issuing shares to existing shareholders would also have its limit because it takes at least two months to raise capital that way. Korean Air and Asiana Airlines need hasty financing as both of them are in financial trouble.”

As part of the deal, the bank is calling for the appointment of three independent directors and gaining the authority to choose the auditor.

The bank also noted that Cho has pledged his own shares as collateral.

“Chairman Cho provided his stock holding of Hanjin KAL worth about 170 billion won as collateral. If the performance doesn’t turn out to be good after the acquisition, Cho has to get rid of his stake,” Choi said.

KCGI said Wednesday it has filed for an injunction with the courts to suspend Hanjn KAL's issuance of new shares. Choi said if the court approves the injunction, the deal could fall apart.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]